ECL Ecolab Inc

Leading cleaning and sanitation products maker Ecolab Inc’s (ECL) second-quarter fiscal 2011 adjusted (excluding special gains/charges and tax-related adjustments) earnings of 64 cents a share matched the Zacks Consensus Estimate while surpassing the year-ago adjusted earnings of 56 cents. The results met the top end of the Minnesota-based company’s guidance of 62-64 cents.

Net income (attributable to Ecolab) for the quarter fell 2.6% year over year to $125.9 million (or 53 cents a share), hurt by roughly $30 million in charges associated with the company’s European restructuring program, which offset a double-digit expansion in the top line.

Net sales surged 11.7% year over year (up 8% in constant currency) to $1,698.8 million, ahead of the Zacks Consensus Estimate of $1,654 million. The results were powered by healthy sales across the company’s core U.S. Cleaning & Sanitizing business as well as Asia-Pacific and Latin American operations, backed by acquisitions and favorable currency exchange translation.

Segment Results

Revenues from Ecolab’s core U.S. Cleaning & Sanitizing division jumped 9.2% year over year to $752.4 million, led by Institutional, Food & Beverage and Kay sub-segments. The U.S. Other Services segment revenues edged up 1.4% to $116.5 million. Sales (at constant currency) from the company’s International operations rose 7.2% year over year to $781.1 million, boosted by the contributions from emerging markets.

Margins

Operating margin contracted to 11.7% from 13.4% a year-ago, as revenue growth was more than offset by sizable restructuring charges. Gross margin fell to 49.3% from 50.7% a year-ago as a result of a 15% rise in cost of sales.

Gross margin was impacted by higher raw material costs which are expected to peak in the third quarter. Ecolab is employing effective pricing strategies to offset the raw material inflation.

Financial Condition

Ecolab ended the second quarter with cash and cash equivalents of $163.2 million, up 34.5% year over year. Long-term debt increased 10.4% year over year to $703.3 million. The company repurchased 0.9 million shares during the quarter.

Guidance and Recommendation

Ecolab has lifted its adjusted earnings per share target for fiscal 2011 to between $2.52 and $2.56 (a 13%-15% year over year growth) from its earlier forecast of $2.49 and $2.53. The adjusted earnings exclude charges associated with the company’s recently announced $8 billion acquisition of Illinois-based water treatment company Nalco Holding Company (NLC) as well as European restructuring.   

For the third quarter, Ecolab envisions adjusted earnings between 73 cents and 75 cents a share. The forecast assumes a dilution of roughly 5-6 cents a share, primarily associated with the company’s restructuring activities but excludes the potential impact of the Nalco buyout. The current Zacks Consensus Estimates for the third quarter and fiscal 2011 are 76 cents and $2.53, respectively.

Adjusted gross margin for the third quarter is expected in the band of 50%-51%. Moreover, Ecolab expects improved year-over-year revenue growth in the quarter.

We are encouraged by Ecolab’s strong international exposure and recovery across its end-markets. The recent move to buy Nalco Holding is a strategic fit and highly complementary for the company, enabling it to bolster its water management business.

However, Ecolab is faced with aggressive competition from the likes of Clorox (CLX) and Church & Dwight (CHD). Moreover, raw material price hikes represent a headwind for the company and its aggressive acquisition strategy has inherent integration risks. We are currently Neutral on the stock.

 
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